Whether Separation Benefits Received as a Result of Involuntary Termination/Separation are Exempt from Income Tax

October 19, 1998 BIR RULING NO. 153-98 32 (B) (6) (b)-000-00-153-98 Famador Campos & Boquia Law Firm Unit 103-A Victoria Condominium 41 Annapolis Street, Greenhills San Juan, Metro Manila Attention: Atty . Moises B . Boquia Gentlemen : This refers to your letter dated July 16, 1998 requesting for a ruling that the separation benefits that Mr. Antonio A. Avis, Jr. will receive as a result of his involuntary termination/separation from the service of the Peninsula Hotel Manila are exempt from income tax and consequently from the withholding tax. prcd It is represented that Mr. Antonio A. Avis, Jr. has been in continuous and uninterrupted employment with the Peninsula Hotel Manila for nineteen (19) years since 1978; that in September 1997, he was suddenly and involuntarily terminated from the service allegedly due to "dishonesty prejudicial to the hotel, guests, officials, employees and others and/or serious misconduct"; that because of such involuntary termination, Mr. Avis filed a case for illegal dismissal with prayer for reinstatement and full backwages against Peninsula Hotel Manila; that in the meantime, Labor Arbiter M. Sol D. del Rosario asked if the parties could settle the case amicably, instead of pursuing it on the merits until its final conclusion; that by way of amicable settlement the Peninsula Hotel Manila offered to pay Mr. Avis, separation benefits provided, he will no longer be reinstated to his position; and that the parties have finally agreed on the payment of the separation benefits of Mr. Avis without reinstatement. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness, or other physical disability or for any cause beyond the control of said official or employee is exempt from income tax regardless of age or length of services. The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions, to wit: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since, Mr. Avis was involuntarily separated, any and all amounts received by said employee as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed under Revenue Regulations No. 2-98. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to the withholding tax (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. Oct. 17, 1991.) It is however, understood that this exemption does not include the payment of Mr. Avis's salaries. llcd This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different from that as represented, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue